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Tuesday, September 12, 2006

The Ten Best Managed Companies In America (ILMN)(XOM)

From 24/7 Wall St.

We set out to pick the ten best managed companies in America for the year that began June 2005 and ended June 2007. At this point virtually all companies have reported their June financials and filed their 10-Qs.

We looked only at companies with market capitalizations of over $1 billion. Most of the companies on the list are much larger. We looked at several financial measurements: return on invested, return on asset, return on equity, gross margins, sales growth over one, three and five years and operating income growth over the same period. To be fair, we made the comparisons within industries so we would not be comparing airlines with banks.The other important aspect to our evaluation, and the most difficult, is picking companies where management mattered. In an industry where all companies are doing very well, good management may not be the single most important key to financial and stock market performance. In difficult industries strong management may save a company. We looked for a combination of excellent long-term strategic decisions and tactical expertise in areas like marketing, operations, or manufacturing.

The companies are not presented in any particularly order. The first company on the list is not considered better managed than the company presented in the sixth or seventh place. We will cover two companies each day for the week so that by Friday the full list of ten will have been posted.

3. Illumina. (ILMN) Many investors have not heard of Illumina. The company makes genotyping tools that assist research centers in mapping the genetic code of individuals. The company's gene chips are highly sophisticated tools that may well be the cornerstone of a great deal of the medical research and drug development platforms of the future.

Illumina traded at $4.07 four years ago. Shares change hands at a little below $33 now. According to an analysis by Morningstar, the company's sales, which grew 45% in 2005, will grow over 120% this year. In the quarter ending July 2, revenue was $41.577 million up from $15,824 million in the same period a year ago. The company had an operating loss of $18.539 million in the quarter last year and an operating profit of $6.768 million this year.

Genomics, the core of the company's business, will allow medical researchers and drug companies the ability to develop "personalized" medical treatments for the individual. The company had the foresight to be at the center of this industry and is now the technology leader. The company is likely to continue its spectacular growth over at least the next several years.

4. ExxonMobil (XOM) The temptation is to view all of the large oil companies equally. But, this would be a mistake. While rising oil has clearly benefited all of Exxon's competitors, raising revenue and stock prices, XOM is operated more efficiently than other companies in the field. Return on assets is now 18.6%. Return on equity is 35.8%. By contrast, at Chevron, the return on assets is 14% and the return on equity is 28%. At ConocoPhillips, the numbers are 12.3% for return on assets and 25.6% for return on equity.

Exxon is not only huge, it is efficiently run, almost beyond imagination given its size. The company's $36 billion profit last year was the large annual profit for any company in history. The company is building its base in areas like Russia and West Africa, areas that are likely to be critical to future production. The company is also quickly building its position in the liquified natural gas industry.

The stock traded just above $30 four years ago. It is now at $65, a significant run for a large cap stock. Over the last five years, XOM has outperformed Chevron by about 10%. The company also sports a yield of almost 2%.